El emprendimiento en América Latina, muchas empresas, poca innovación.

WORLD BANK LATIN AMERICAN
AND CARIBBEAN STUDIES

Latin American
Entrepreneurs
Many Firms but Little Innovation

Daniel Lederman, Julián Messina,
Samuel Pienknagura, and Jamele Rigolini

FM_main_ENTinLAC_i-xvi.indd 2

11/21/13 5:30 PM

Latin American Entrepreneurs
Many Firms but Little Innovation


11/21/13 5:30 PM

Latin American
Entrepreneurs
Many Firms but
Little Innovation
Daniel Lederman, Julián Messina,
Samuel Pienknagura, and Jamele Rigolini


11/21/13 5:30 PM

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Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv

1. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Entrepreneurship is a driver of development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Entrepreneurship is vibrant— ut growth is weak. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
b
The region has many entrepreneurs but little innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Few companies enter export markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Even large multinational corporations in the region are insufficiently innovative . . . . . . . . . 13
How can policy enable innovative entrepreneurs?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Structure of the report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2. Entrepreneurship, Entry, and the Life Cycle of Firms in Latin America

and the Caribbean: Are All Forms of Firm Creation Entrepreneurial? . . . . . . . . . . . . . . . . . 23
Low-evel entrepreneurs, high-evel entrepreneurs, and employees. . . . . . . . . . . . . . . . . . . . . 24
l
l
Theoretical framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Business creation in Latin America and the Caribbean. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Beyond entry: Firm dynamics in Latin America and the Caribbean. . . . . . . . . . . . . . . . . . . . 42
What is hindering high- rowth entrepreneurship: Culture, institutions,
g
or the environment?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

3. Entrepreneurship by Incumbent Firms: What Explains the Innovation Gap? . . . . . . . . . . . . . 61
What drives innovation? A conceptual framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
How innovative are firms in Latin America and the Caribbean? . . . . . . . . . . . . . . . . . . . . . . 67
What explains the innovation gap?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
v


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vi C o n t e n t s

4. Export Entrepreneurship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Exporting as a transformative entrepreneurial act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Contribution of export entrepreneurship in the medium term . . . . . . . . . . . . . . . . . . . . . . . . 98
Descriptive benchmarking of export entrepreneurship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Econometric benchmarking of export entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Export promotion policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

5. Foreign Direct Investment, Multinational Corporations, and Innovation . . . . . . . . . . . . . . 121
Foreign multinational corporations in Latin America and the Caribbean . . . . . . . . . . . . . . 123
Multilatinas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

6. Toward an Enabling Environment for Innovative Entrepreneurs. . . . . . . . . . . . . . . . . . . . . . 141
What are the elements of an enabling environment for innovative entrepreneurs?. . . . . . . . . 142
What explains the region’s innovation gap? The leading suspects . . . . . . . . . . . . . . . . . . . . . 149
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Boxes
2.1
2.2
2.3
2.4
3.1
3.2
3.3
5.1

Main databases used in the study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Do training programs for entrepreneurs work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Comparing firm size across age cohorts in Colombia using Enterprise Surveys
and administrative data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Importing entrepreneurs: Start- p Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
U
Risk, laws, macroeconomics, and the innovation gap in Latin
America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Management matters: How better practices could increase productivity
in Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Do’s and don’ts of entrepreneurship ecosystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Can a whale in a swimming pool create a splash? Intel and the upgrading
of tertiary education in Costa Rica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Figures
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11


Type of employment, by GDP per capita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Innovation edge of medium and large firms over small firms in Latin America
and the Caribbean, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Relationship between type of employment and GDP per capita, 2010. . . . . . . . . . . . . . . . 4
Firm dynamics: entry, age, and size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Employment growth in Colombia, by firm size and age . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Percentage of firms in selected countries introducing a new product, 2006–10. . . . . . . . . 8
Investment in research and development (R&D) in selected country groups, 2008– 0. . . 9
1
Number of patents per capita granted by U.S. Patent and Trademark Office,
actual and benchmarked, by inventor’s country or place of residence. . . . . . . . . . . . . . . . 9
Management practices in selected economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Average entry and one- ear survival rates in selected countries (differences with
y
respect to baseline) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Sources of export growth in selected countries, 2005– 7 and 2008– 9. . . . . . . . . . . . . 13
0
0

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C o n t e n t s
vii

1.12

Innovation edge of foreign multinational corporations over local firms
in Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.13
Predicted productivity gains from entry of new multinational corporations
in selected country groups, countries, and economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.14
Spending on research and development (R&D) in Latin America and the Caribbean. . . 15
1.15
Sectoral position of foreign subsidiaries relative to headquarters in selected country
groups, countries, and economies, 2010–11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.16
Actual and benchmarked index of competition in 17 nontradable industries
in selected countries or economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.17
Income and engineering density in selected economies, 1900 . . . . . . . . . . . . . . . . . . . . . 18
1.18
Number of engineers per million people in selected countries. . . . . . . . . . . . . . . . . . . . . 18
1.19
Actual and benchmarked index of intellectual property rights in selected countries
or economies, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.1
Model of entrepreneurship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.2
Occupational choice and GDP per capita, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.3
Income distribution in Latin America and the Caribbean by type of occupation,
circa 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.4
Rate of formal business ownership in selected country groups, countries,
and economies, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.5
Share of firms with no employees in selected country groups, countries,
and economies, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.6
Distribution of firm size in selected country groups, countries, and economies, 2011. . . 35
2.7
Push versus pull entrepreneurship in selected country groups, countries,
and economies, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.8
New firm entry rates and GDP per capita in selected countries, 2004– 1. . . . . . . . . . . . 39
1
2.9
Time required to start a business in selected country groups, countries,
and economies, 2004 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.10
Relationship between business formality and barriers to entry in selected countries,
various years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.11
Employment growth in Colombia, by firm size and age cohort. . . . . . . . . . . . . . . . . . . . 44
2.12
Net employment growth rates by firms in Colombia, by establishment age
and size, 1994– 009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2
B2.3.1 Employment in establishments in Colombia, by age of establishment. . . . . . . . . . . . . . . 47
2.13
Firm size in Latin America and the Caribbean, by age of firm, 2006– 0 . . . . . . . . . . . . 48
1
2.14
Age distribution of top 100 firms in selected country groups . . . . . . . . . . . . . . . . . . . . . 49
2.15
Share of business establishments in Argentina owned by foreigners, 1910 . . . . . . . . . . . 50
2.16
Entrepreneurship among immigrants and natives in the United States,
by type of business and country. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2.17
Marginal effects of years in United States on entrepreneurship gap between migrant
and nonmigrant white men, by cohort of arrival and region. . . . . . . . . . . . . . . . . . . . . . 54
3.1
Extensive and intensive margins of innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.2
Percentage of firms in selected countries that introduced a new product
in the past year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.3
Average investment in research and development, by region and level of GDP,
2008–10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.4
Number of patents per capita granted by U.S. Patent and Trademark Office,
actual and benchmarked, by inventor’s country or place of residence . . . . . . . . . . . . . . . 69
B3.2.1 Correlation between management quality and productivity in selected countries
and economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3.5
Management practices in selected countries or economies . . . . . . . . . . . . . . . . . . . . . . . 71
3.6
Distribution of overall management scores in Brazil and the United States. . . . . . . . . . . 72


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viii C o n t e n t s

3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.16
3.17
3.18
3.19
3.20
3.21
3.22
3.23
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15

4.16


Relationship between investor protection and time required to register property
and innovation in Latin America and the Caribbean. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Doing Business in selected country groups and countries, circa 2004 versus 2013. . . . . . 75
Relationship between competition and various aspects of innovation
in Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Appointment of head of regulatory agency in Latin America and the Caribbean. . . . . . 77
Level of allowed government intervention in regulatory decisions. . . . . . . . . . . . . . . . . . 78
Scope of action of regulatory agencies in Latin America and the Caribbean. . . . . . . . . . 78
Transparency practices of regulatory agencies in Latin America and the Caribbean . . . 79
Maximum fines imposed by regulatory agencies in selected countries in Latin
America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Credit, investment, and innovation in Latin America and the Caribbean. . . . . . . . . . . . 81
Depth of financial systems in selected country groups and countries,
1995 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Private equity and venture capital investments, by region, 2002– 1 . . . . . . . . . . . . . . . . 83
1
Number and size of private equity and venture capital deals in Latin America
and the Caribbean, by country, 2008– 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
1
Access to credit, by region and age of firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Likelihood of spin- ff firm after five years, by type of entrant . . . . . . . . . . . . . . . . . . . . 85
o
Engineering density and GDP of selected countries, 1900. . . . . . . . . . . . . . . . . . . . . . . . 85
Actual versus perceived management quality in Argentina, Mexico, Chile,
and Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Domestic versus international spillovers in patenting activity . . . . . . . . . . . . . . . . . . . . . 89
Strategic objectives of export promotion agencies, by region. . . . . . . . . . . . . . . . . . . . . . 99
Share of total exports accounted for by new export entrants in seven countries
in Latin America and the Caribbean, 2005– 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
0
Share of total exports accounted for by continuous exporters in seven countries
in Latin America and the Caribbean, 2004– 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
0
Export growth and its components in selected countries, 2005– 7 and 2008– 9 . . . . 103
0
0
Product entry, exit, and first- ear survival rates of incumbent exporters in selected
y
countries, 2005– 7 and 2008– 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
0
0
Size of new product exports relative to incumbent products in selected countries,
2005–07 and 2008–09. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Export growth of incumbent exporters in selected countries and its decomposition
along the product dimension, 2005– 7 and 2008– 9. . . . . . . . . . . . . . . . . . . . . . . . . . 107
0
0
Destination entry, exit, and first- ear survival rates of incumbent exporters
y
in selected countries, 2005– 7 and 2008– 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
0
0
Exports to new destinations as a share of total exports by incumbent exporters
in selected countries, 2005– 7 and 2008– 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
0
0
Export growth of incumbent exporters in selected countries and its decomposition
along the destination dimension, 2005– 7 and 2008– 9 . . . . . . . . . . . . . . . . . . . . . . . . 111
0
0
Conditional benchmarking of export entry rates by sector, 2005– 9. . . . . . . . . . . . . . 112
0
Conditional benchmarking of one- ear export survival rates by sector, 2005– 9 . . . . . 113
y
0
Conditional benchmarking of export entry rates in selected countries, 2005– 9. . . . . . 113
0
Conditional benchmarking of one- ear export survival rate in selected countries,
y
2005–09. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Conditional benchmarking of export entry and one- ear survival rate in selected
y
countries after controlling for GDP per capita and comparative
advantage, 2005–09. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Partial effects of 1 percent increase in index of revealed comparative advantage
on export entrepreneurship indicators in seven countries in Latin America
and the Caribbean, 2005– 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
0

11/21/13 5:30 PM

C o n t e n t s
ix

5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
6.1
6.2
6.3
6.4
6.5
6.6

Inward foreign direct investment and multinational activity
in Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Difference in number of patents held by multinational parent and local firms
in home country in selected country groups, countries, and economies, 2010–11 . . . . 125
Difference in innovation between multinational affiliates and local firms
in the host economy in Latin America and the Caribbean, 2010 . . . . . . . . . . . . . . . . . 126
Product innovation by foreign multinational affiliates in selected
country groups and economies, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Research and development by foreign affiliates of U.S. multinational
corporations in selected regions, 1998 and 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Sources of predicted productivity gains associated with entry of multinational
corporations, by country groups, countries, and economies, 2002– 0 . . . . . . . . . . . . . 130
1
Share of total revenues of multilatinas by country or country group of origin,
2010–11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Actual and benchmarked revenue of multinational corporations in selected
countries and economies, relative to given characteristics, 2010–11 . . . . . . . . . . . . . . . 133
Factors driving Brazilian firms to cross borders, 2010–11. . . . . . . . . . . . . . . . . . . . . . . 134
Sectoral position of foreign subsidiaries relative to headquarters in selected country
groups, countries, and economies, 2010–11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Origin of revenues of multilatinas, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Management practices by firms in the United States and selected countries
in Latin America and the Caribbean, by type of firm . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Research and development by multinational corporations in selected
country groups, countries, and economies, 2010–11. . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Actual and benchmarked access to credit by young firms in selected countries . . . . . . . 143
Actual and benchmarked index of intellectual property rights in selected
countries or economies, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Actual and benchmarked contract certainty in selected countries
or economies, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
Actual and benchmarked index of competition in 17 nontradable industries
in selected countries or economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Actual and benchmarked index of openness to trade in selected countries, 2012. . . . . 148
Actual and benchmarked share of engineers in selected countries, 2008– 0 . . . . . . . . . 149
1

Tables
2.1
2.2
2.3
3.1
4.1
4.2
4.3
6.1


Socioeconomic characteristics of business owners in selected country groups,
countries, and economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Dynamics of manufacturing firms in Colombia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Five- ear changes in size categories for establishments of different ages in Chile
y
and Colombia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Firm characteristics in Latin America, the United States, and China . . . . . . . . . . . . . . . 72
Number of new and incumbent exporters in seven countries in Latin America
and the Caribbean, 2005– 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
0
Export growth by new entrants and incumbents in seven countries in Latin America
and the Caribbean, 2004– 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
0
Treatment effects of export promotion agencies in seven countries in Latin America
and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Factors that may account for innovation deficits in 13 countries in Latin American
and the Caribbean, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

11/21/13 5:30 PM


11/21/13 5:30 PM

Foreword

F

or almost a decade, emerging market
economies, including several countries
in Latin America and the Caribbean
(LAC), were regarded by analysts and investors as new engines of growth. Their growth
before the global financial crisis sparked
enthusiasm that, after a short pause during
the 2008 crisis, was cemented by vigorous
recoveries in 2009 and 2010. A new story line
seemed to dominate: thanks to deep structural changes, both domestic and global, the
potential of emerging market economies had
finally arrived.
In the past few months, enthusiasm for
emerging markets appears to have soured.
A notable slowdown has cast doubts on the
sustainability of their high growth rates of the
past decade and revived old fears of macro
economic and financial turbulence. Phrases
such as “submerging economies” have
become common in financial periodicals.
The truth is that major LAC economies
experienced lackluster growth for decades
before the boom of the 2000s. At the beginning of the 20th century, a simple average of the region’s gross domestic product
per capita was about 38 percent that of the
United States. By 2012, that ratio was about
35 percent.
The change implies that over 110 years,
the large economies of LAC grew at a slower

rate than the United States and, more important, were unable to take advantage of their
relative underdevelopment by catching up to
the United States and other developed economies that became the sources of technologies
that are now commonplace around the globe.
LAC did not need to invent, just to imitate
and adopt technologies, as some economies
in East Asia were able to do.
All this is not to say that the recent enthusiasm for LAC’s emerging markets was unwarranted. The enthusiasm was justified by the
substantial and unprecedented social progress in the region during this recent growth
spurt, as documented in a previous regional
flagship report, Economic Mobility and the
Rise of the Latin American Middle Class.
That report provided evidence of remarkable
progress:
• Nearly 70 million people were lifted
out of poverty in the past decade.
• Approximately 50 million people
entered the ranks of the middle class
between 2003 and 2009.
• Income inequality, as measured by the
Gini coefficient, fell steadily, dropping
from its peak of 0.58 in 1996 to the
lowest level ever recorded in the region,
0.52, in 2011, a decline of more than
10 percent.

xi


11/21/13 5:30 PM

xii F O R E W O R D

• About one-third of the poverty reduction was the result of social policies
that transferred incomes to the poor,
but labor market income during the
boom years accounted for the remaining two-thirds. In other words, growth
is required to sustain poverty reduction
and middle class expansion.
What makes the productivity challenge pressing is precisely the fact that social progress has
been tied to growth. Thanks to current policies, social programs can be maintained in the
short term. The risk is that these gains may be
lost if growth remains low for too long.
With global tailwinds receding, the region
will need to rely on its own devices to spur
growth. Those devices have only one name:
productivity. With scant domestic savings and receding external capital inflows,
income growth can be sustained only by productivity gains.
Leaders in the region are fully aware of the
importance of boosting productivity. But what
is this battle about? This report argues that it
is about establishing an enabling environment
in which entrepreneurs can emerge, compete,
and innovate. It is about building an innovative entrepreneurial class in which top-notch
firms—firms that export goods, services, and
even capital—no longer look tepid in contrast
to entrepreneurial superstars elsewhere.
Beyond generalities, the main elements of
an enabling environment for entrepreneurship and innovation include the following:
• Building human capital. The challenge of raising the quality of education
remains, but it goes well beyond test
scores. For example, LAC has a historic
deficit of engineers, dating at least to
the early 20th century.


• Improving logistics and infrastructure.
Modernizing ports, transport, and
customs can add a competitive edge
to products from the region. The current infrastructure deficit also needs to
be addressed in order to end capacity
constraints that become evident at low
growth rates.
• Enhancing competition. Although the
region has globalized, many industries
remain sheltered from competition.
This protection has the dual negative
effects of reducing productivity growth
in those sectors and handicapping the
export sector, which relies on their services and intermediate goods.
• Improving the contractual environment. Although intellectual property
rights are not the only relevant aspect
of domestic institutions that affect productivity, innovation is unlikely to take
root without adequate protection.
With LAC’s recent social gains, growing
demands for access to good-quality services
have increased. Middle classes expect not
only income gains so that their children will
see even more progress in the future but also
improved public services for the current generation. With increased productivity, private
incomes will rise, increasing public revenues
and the state’s capacity to invest in service
delivery. In time, if we win the productivity
battle, we will enter into a virtuous cycle of
stronger public sectors, higher growth, and
opportunities for all.
Augusto de la Torre, Chief Economist
Hasan Tuluy, Vice President
Latin America and the Caribbean Region
The World Bank Group

11/21/13 5:30 PM

Acknowledgments

T

his report was prepared by a team led
by Daniel Lederman, Julián Messina,
Samuel Pienknagura, and Jamele
Rigolini. Important additional contributions
were made by Paolo Benedetti, Claudio
Bravo-Ortega, Maggie Chen, Paulo Correa,
Ana Paula Cusolito, Marcela Eslava, Ana M.
Fernandes, Mario utierrez-Rocha, Mary
G
Hallward-Driemeier, John Haltiwanger,
Thomas Kenyon, Leora Klapper, William
M a l o n e y, Yo t a m M a r g a l i t , D a v i d
McKenzie, Camilo Mondragón, Marcelo
Olarreaga, Aitor Ortiz, Caglar Ozden,
Markus Poschke, Douglas Randall, Miguel
Sarzosa, Murat Seker, Marco Vivarelli, and
Lucas Zavala. The team was ably assisted
by Juan Manuel Puyana, Juan Pablo Uribe,
and Cynthia van der Werf. The work was
conducted under the general guidance
of Augusto de la Torre, Chief Economist
for the Latin America and the Caribbean
Region of the World Bank.
The team was fortunate to receive advice
and guidance from four distinguished peer
reviewers: Caroline Freund, Jose Guillerme

Reis, Pablo Sanguinetti, and Antoinette
Schoar. While we are very grateful for the
guidance received, these reviewers are not
responsible for any remaining errors, omissions, or interpretations. Additional insights
from Pablo Acosta, Tito Cordella, Leonardo
Iacovone, Mariana Iootty de Paiva Dias,
Esperanza Lasagabaster, Martha MartínezLicetti, Marialisa Motta, Oltac Unsal, María
Pluvia Zuñiga, and other participants in
a workshop that took place on November
15–16, 2012 are gratefully acknowledged.
We also want to thank Mauro Lopes Mendes
de Azeredo, Marcela Sánchez-Bender, and
the World Bank’s Latin America and the
Caribbean Finance and Private Sector Development and International Trade teams for
valuable comments.
Book design, editing, and production were
coordinated by the World Bank’s Publishing
and Knowledge department under the supervision of Patricia Katayama and Mark Ingebretsen. Last but not least, we thank Ruth
Delgado and Jacqueline Larrabure Rivero for
unfailing administrative support.

xiii


11/21/13 5:30 PM


11/21/13 5:30 PM

Abbreviations

BEEPS
CAFTA
CRC
EAP4
ECA
EPA
FTA
GDP
GIPBP
HS
ICRG
ICS
IPA
IPRs
LAC
LAC5
MNC
PEVC
PPP
R&D
RCA
SME
TPF
USPTO

Business Environment and Enterprise Performance Surveys
Central America Free Trade Agreement
Centro Regional de Competencia para América Latina
Indonesia, Malaysia, the Philippines, and Thailand
Europe and Central Asia
export promotion agency
free trade agreement
gross domestic product
Global Investment Promotion Best Practices
Harmonized System
International Country Risk Guide
Investment Climate Surveys
investment promotion agency
intellectual property rights
Latin America and the Caribbean
Argentina, Brazil, Chile, Colombia, and Mexico
multinational corporation
private equity and venture capital
purchasing power parity
research and development
revealed comparative advantage
small and medium enterprise
total factor productivity
U.S. Patent and Trademark Office

xv


11/21/13 5:30 PM


11/21/13 5:30 PM

Overview

Entrepreneurship is a
driver of development
Successful entrepreneurs are individuals who
transform ideas into profitable commercial
enterprises. This process often requires special
talents, including a capacity to innovate, to
introduce new products, and to explore new
markets. It also requires an ability to manage
others, to assign priorities to tasks to increase
the efficiency of production, and to make the
best use of available resources. But these talents are not enough. Successful entrepreneurs
thrive in favorable economic and institutional
environments that enhance the expected
returns of innovation. When an enabling
environment exists, entrepreneurs take risks
and invest in innovation, spurring productivity gains through the dynamics of firm entry
and exit and innovation by incumbent firms,
thus fostering economic development.
Why should policy makers care about
entrepreneurs, who tend to be among the
better off in the population? The answer is
simple: entrepreneurship is a fundamental
driver of growth and development. Indeed,
the basic premise of this report— ne that is
o
shared by most economists since Adam Smith

1

and was greatly strengthened by the seminal
work of Joseph Schumpeter—s that creative
i
entrepreneurs are not just byproducts of the
development process but important drivers of
such a process. Entrepreneurs are key actors
in the transformation of low-ncome societies
i
characterized by low productivity and often
subsistence self- mployment into dynamic
e
economies characterized by innovation and a
rising number of well- emunerated workers.
r
To the extent that causal links from entrepreneurship to productivity growth are at
work, there is room for using policy levers to
quicken the development process by improving the incentives and supportive institutions
that facilitate innovation by entrepreneurs.
These analytical and policy issues motivate
this report, which explores the challenges
faced by potential high- rowth, transformag
tional entrepreneurs in Latin America and
the Caribbean (LAC).
Figure 1.1 depicts the transition from
self- mployment toward wage employment
e
that tends to go hand in hand with economic development. It shows that up to a
gross domestic product (GDP) per capita of
about $2,000 (adjusted for purchasing power

1

01_ENTinLAC_001-022.indd 1

11/21/13 4:00 PM

2

LATIN AMERIC AN ENTREPRENEURS

FIGURE 1.1 Type of employment, by GDP per capita
100

Workers (%)

80
60
40
20
0

300

500

1,000

2,500 5,000
GDP per capita

All agricultural workers
Nonagricultural employer
Nonagricultural unpaid

10,000

25,000 50,000

Nonagricultural wage and salaried
Nonagricultural own account

Source: Gindling and Newhouse 2012.
Note: Employment shares are calculated based on data from household surveys. GDP = gross
domestic product.

parity), agricultural workers make up most
of the labor force, followed by the nonagricultural self- mployed; wage employment
e
outside agriculture comes only third. The
incidence of wage employment rises gradually
thereafter, becoming the most important type
of employment at a GDP per capita of about
$5,000. In countries such as Canada and the
United Kingdom, more than 85 percent of
employment consists of salaried employees
(Gindling and Newhouse 2012).
The transition from self- mployment to
e
wage employment is part and parcel of the
development process, in which entrepreneurs
play a crucial role. Creative entrepreneurs
are typically behind the most dynamic and
productive firms—he ones that innovate,
t
expand production, and generate jobs at a
comparatively rapid pace. These firms not
only create employment opportunities, they
also create better employment. For a given
set of skills, across the world, more productive firms, which tend to be the larger
ones, pay higher wages. In LAC, for example, medium firms (with 5– 5 employees)
2
pay 20– 0 percent higher wages than small
4
firms, and large firms (with more than 25
employees) pay 30– 0 percent higher wages.1
6


This stylized fact is shared across countries, albeit with less intensity in the more
advanced economies. It is not attributable to
observable differences in the distribution of
workers’ skills or education across firms of
different sizes.
Medium- ize and large firms, which are
s
typically run by the most dynamic entrepreneurs, are also more likely to engage in various forms of innovation. They are more likely
to export to foreign markets, obtain patents,
invest in research and development (R&D),
introduce new products, improve production processes, cooperate on innovation with
other firms, import new technologies, and
export capital to establish affiliates in foreign
markets (figure 1.2).
Research on entrepreneurship in LAC may
deepen our understanding of the region’s
lagging productivity growth. Although LAC
experienced remarkable growth in the first
decade of the new millennium— specially
e
compared with its own past and growth in
the advanced economies— here are reasons
t
to doubt the long-erm sustainability of such
t
high growth rates. A significant part of the
recent growth spurt appears to be related to
the commodity boom. Productivity growth
remains modest (Busso, Madrigal, and
Pagés-Serra 2012), particularly in the nontradable services sector (Pagés-Serra 2010),
which through the natural process of structural transformation is attracting a growing
share of the LAC urban workforce.
Measuring entrepreneurship is not an easy
task, however, because it is related to the
individual talents and characteristics of a few
elite businesspeople. Following Schumpeter
(1911), this report adopts a broad definition
of entrepreneurship that focuses on what is
new for the market. 2 Entrepreneurship thus
includes firm entry into new or existing
markets (both domestic and foreign), the
introduction of new products to the market, and organizational improvements that
enable firms to improve the quality or price
of their products or achieve more efficient
modes of production. The report adopts various terms to refer to this type of innovative
entrepreneurship, including “high- rowth,”
g

11/21/13 4:00 PM

O v er v ie w
3

“high- nd,” and Lerner’s and Schoar’s (2010)
e
“transformational” entrepreneurship. The
important point is to differentiate entrepreneurs with high growth potential from small
firms and self- mployed individuals with low
e
growth potential.
The report uncovers some bright spots. It
finds that LAC is a region of entrepreneurs,
as evidenced by the large number of business owners per capita relative to countries
with similar incomes per capita. Moreover,
the large number of entrepreneurs is not— s
a
often believed— ainly a reflection of a large
m
informal sector in which low- roductivity
p
firms are constantly emerging and dying. The
share of business owners with formally registered firms is also relatively high in several
LAC economies.
At the top end of the entrepreneurial
spectrum, LAC experienced impressive
export entrepreneurship activity during
2004– 9. Stimulated by global tail winds
0
and augmented by comparative advantage,
recently implemented trade agreements, and
well-argeted export promotion policies,
t
the region saw impressive survival rates by
exporters. It also witnessed the emergence
of multinational enterprises— ultilatinas—
m
which are increasingly extending their
influence beyond their countries’ borders,
particularly into neighboring countries.
These bright spots notwithstanding, the
report identifies a glaring weakness in LAC’s
entrepreneurship landscape— amely, the
n
low level of innovation. Firms in the region
suffer from a chronic and substantial innovation gap relative to comparator countries
and regions. This gap exists not only in terms
of R&D and patenting but also in terms of
product and process innovation. Innovation
gaps are found among small and large firms
alike. Indeed, even the region’s superstar
entrepreneurs—exporters and multilatinas—
lag in important dimensions of innovation.
Entry rates into exporting activities by LAC
firms have been particularly low, although
incumbent exporters did become more
innovative under duress during the global
financial crisis of 2008– 9. Multilatinas are
0
less innovative, less well managed, and less


FIGURE 1.2 Innovation edge of medium and large firms over small
firms in Latin America and the Caribbean, 2010

Labor productivity
Exporter
Exports share
Invested in R&D
Patent abroad
Patent, trademark,
or copyright
New or significantly
improved process
Patent in country
New products introduced
Medium firms
Large firms
95% confidence
interval

Technology from a foreignowned company
Cooperates on innovation
0

10

20
30
Marginal effect (%)

40

50

Source: World Bank, based on data from 2010 Enterprise Surveys.
Note: Bars represent the marginal effect of a medium and large dummy variable in a regression
controlling for firm, sector, and country characteristics. Small firms have 0–50, medium firms
51–100, and large firms more than 100 employees. Robust standard errors were calculated. Each
country has the same weight in the regional average. R&D = research and development.

productive than similar multinationals from
other regions.
The rest of this overview is structured as
follows. The next section documents the surprising vibrancy of entrepreneurship in the
region, as measured by the large number of
enterprises. It highlights the crucial distinction between “small” and “young” firms.
Businesses that grow rapidly and become
employment poles are more likely to be young
firms, but they are not necessarily small. The
third section documents the acute shortfall
in innovation that characterizes LAC entrepreneurship—n product innovation, pati
ents, R&D, and managerial practices. The
fourth section examines various stylized facts
about export entrepreneurship in the region,
including low entry rates coupled with solid
survival rates and strong responsiveness to
adverse circumstances. The fifth section

11/21/13 4:00 PM

4


examines the performance of multilatinas in
the broader context of multinational corporations in LAC, with a focus on their low level
of innovation. The last section discusses possible links between entrepreneurship, innovation, and structural features of the enabling
environment in LAC.

Entrepreneurship is vibrant—
but growth is weak
In contrast to commonly held views, LAC
is characterized by vibrant entrepreneurship, as measured by the number of firms
per capita. The share of entrepreneurs in
the population is higher than in comparator countries and regions. Perhaps more
surprisingly, the incidence of formal businesses is also high. This fact suggests that
the enterprise sector is much more than a
large informal sector. However, the region
lags in the nature of the businesses created.
Firms in LAC tend to be smaller (in terms of
the number of employees) at birth than firms
in other regions at similar levels of development, and the growth process fails to compensate for the initial gap in employment.
Even the largest firms in LAC create fewer
jobs than the largest firms in other regions.
How to address the gap in firm growth is a

fundamental policy question. Addressing it
requires a change in policy paradigm from
the current emphasis on supporting small
firms toward an emphasis on supporting
start- ps and young firms.
u
Figure 1.3 captures both the vibrancy of
the entrepreneurial environment and some of
its deficits. It shows that in many countries
in the region, the share of (nonagricultural)
employers in the population is much larger
than in countries at similar levels of economic development (panel a). However, these
employers do not generate sufficient wage
employment, as the share of own- ccount
a
workers in the population is also above the
expected levels (panel b). This characteristic
is linked to the large informal sectors that
constitute a developing country hallmark.
Entry into the higher end of the formal
sector, measured by registration of new limited liability firms, remains low in many LAC
countries3 relative to their level of economic
development. Figure 1.4 (panel a) displays
the relationship between firm entry (measured by the average annual number of new
limited liability firms registered per 1,000
working- ge people during 2004– 1) and
a
1
the level of economic development (measured by the average per capita income for
the same period) across 129 countries. Entry

FIGURE 1.3 Relationship between type of employment and GDP per capita, 2010
a. Nonagriculture, employer

b. Nonagriculture, own account

8

40

6

CRI

SLV

HND

2

BOL

PER

VEN
MEX
URY

COL
JAM
DOM

Percent

Percent

PRY
GTM

DOM
COL
VEN

30

ECU

4

HTI

CHL

SLV
HND
PER
URY
BOL
ECU
PRY
JAM
CHL
CRI
GTM
MEX

20
10

HTI

0

0
6

7
8
9
10
Log of GDP (PPP) per capita

11

LAC countries

6

7
8
9
10
Log of GDP (PPP) per capita

11

Non-LAC countries

Source: World Bank, based on data from Gindling and Newhouse 2012 and World Development Indicators.
Note: Curves shows quadratic fitted values. GDP = gross domestic product. LAC = Latin America and the Caribbean. PPP = purchasing power parity.


11/21/13 4:00 PM

O v er v ie w
5

FIGURE 1.4 Firm dynamics: entry, age, and size
a. Entry rates and GDP per capita

b. Average workers by firm age
300

20

250
Number of employees

Entry density

15

10

5

200
150
100
50

0
6

7

8
9
10
11
Log of GDP per capita
LAC countries
Non-LAC countries

0

1–4

5–9
LAC

10–19
High-income
countries

20–29

30–39
ECA

40+
EAP4

Sources: Panel a: World Bank, based on data from World Development Indicators and World Bank Group Entrepreneurship Snapshots (WBGES). Panel b: World Bank, based on data
from 2006–10 Enterprise Surveys.
Note: Panel a: Each point represents the average between 2004 and 2011. Curve shows quadratic fitted values. GDP = gross domestic product. LAC = Latin America and the Caribbean. Panel b: ECA (Eastern Europe and Central Asia): Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Georgia, Kazakhstan, Latvia, Lithuania, FYR Macedonia,
Moldova, Romania, Russian Federation, Serbia, Turkey, Ukraine, and Uzbekistan. EAP4: Indonesia, Malaysia, the Philippines, and Thailand. High income: Croatia, the Czech Republic,
Hungary, Poland, the Slovak Republic, Slovenia, and Spain; LAC: Latin America and the Caribbean. The most recent survey available for each country was used. Each country has the
same weight in the regional averages. Size at birth above 10,000 was replaced by “missing.”

is positively associated with GDP per capita,
and in many LAC countries entry rates are
below the expected level. However, there is
substantial heterogeneity within the region,
with some countries located above the benchmark. The most salient example is Costa
Rica, with an entry rate of almost 16 new
firms per 1,000 working- ge people—our
a
f
times the international benchmark. Argentina and Mexico, by contrast, exhibit rates of
entry substantially below those suggested by
their GDP per capita.
The fact that on average LAC displays
uninspiring rates of entry of formal limited
liability firms has led many observers to single out entry barriers as the main culprit.
In the last decade, however, LAC countries
made significant progress in reducing such
barriers. The burden imposed by red-ape
t
entry- elated regulations is still higher in LAC
r
than in comparator regions. But the time to
set up a business, for instance, was halved in
less than a decade (World Bank 2013).
Moreover, the variance across countries
in the number of procedures, length of time,
and costs associated with setting up a new


business declined steadily in the 2000s. LAC
was no exception, exhibiting stronger deregulation among countries that started with the
highest levels at the turn of the millennium.
However, the significant reduction in entry
barriers has not made a visible dent in the
region’s entry rates of limited liability firms,
which lie at the high end of the formal sector.
This failure could be interpreted as an indication that the effects of changes in entry barriers come with a considerable lag. A more
plausible interpretation may be that either
entry barriers are not the most binding constraint to formal entry in LAC or that reducing entry barriers alone, without achieving a
critical mass of complementary reforms, is
insufficient to spur entry.
Another salient feature of LAC entrepreneurship is that new firms do not grow as
much as firms in other regions and thus tend
to remain small. Panel b of figure 1.4 plots
the average age of firms against the average
number of employees for different regions.
It shows that LAC has the smallest new
firms (in terms of number of employees) of
any region.4 Even the largest new firms (the

11/21/13 4:00 PM

6


importance for the design and effectiveness
of SME support programs.
The empirical basis for emphasizing this
distinction is illustrated by a detailed analysis
of the dynamics of (formal) manufacturing
firms in Colombia by Eslava and Haltiwanger (2013), as well as by research on firm
dynamics in the United States. Figure 1.5
presents some of the results on the importance of firm size versus firm age for the generation of employment in Colombia. Panel a
focuses on “continuers” (that is, firms that
remained alive throughout the sample period)
and therefore abstracts from firm entry and
exit. Growth increases with size and declines
with age, as stands to reason (that a firm that
did not expand quickly during its youth or
middle- ge years is arguably less likely to
a
enjoy a growth spurt in old age). However,
differences in growth rates are much more
marked along the age dimension than along
the size dimension. Firms of all sizes grow
fastest in their early years, especially their
first four years.
Even more interesting is the fact that the
average growth rates of firms in their early
years increase rapidly with size— hat is, firms
t

90th percentile of the size distribution of new
firms) are about half the size of new firms in
other regions.5 Moreover, differences in size
widen as firms age: LAC firms that are 40 or
more years old are on average half the size of
firms the same age from high-ncome couni
tries and Eastern Europe and Central Asia
(ECA) and one- hird the size of firms in the
t
middle-ncome countries of East Asia and
i
Pacific (EAP4)—ndonesia, Malaysia, the
I
Philippines, and Thailand.
Policy makers in LAC have typically tried
to address the lackluster growth of firms by
focusing on smallness per se. Together with
a concern about employment, this focus has
taken the form of a myriad of government-
sponsored programs that support small and
medium enterprises (SMEs). Eligibility for
accessing support depends largely on size,
typically measured by the number of employees. The evidence in this report casts doubt
on this overemphasis on smallness and points
to the need to shift the focus toward young
(rather than small) firms. Most young firms
are small, but a relatively large share of small
firms are not young— distinction this report
a
highlights as having potentially critical

FIGURE 1.5 Employment growth in Colombia, by firm size and age
a. Continuers

b. All establishments
0.6

0.10

0.05

Growth rate

Growth rate

0.4

0

0.2
0
–0.2

–0.05
Small

Medium
Size of firm
Age of firm:

Large
All

0–4 years

Small
5–9 years

10–14 years

Medium
Size of firm

Large

15+ years

Source: Eslava and Haltiwanger 2013.
Note: Small: fewer than 50 employees; medium: 51–200 employees; large: more than 200 employees. Growth rates are defined as in Davis, Haltiwanger, and Schuh (1996). They are
the change in employment between two consecutive periods divided by the average employment between the two periods.


11/21/13 4:00 PM

O v er v ie w
7

that are young and large grow the most, making the largest contribution to job creation.
This fact contradicts the popular belief that
most employment generation occurs among
small firms. The confusion stems from the
failure to distinguish between the stock of
firms and their growth dynamics. Even if at
any point in time small firms were to account
for most of the jobs in the economy, it does
not follow that all small firms (independent
of age) are equally responsible for employment generation over time. Rather, it appears
that job creation comes from young firms,
regardless of their size.
When all firms in the Eslava- altiwanger
H
sample (not just firms that stayed alive
during the sample period but also firms that
were created or died during that period) are
examined, the picture changes in an important respect (panel b of figure 1.5). Although
young firms continue to be the main contributors to employment growth, the role of size
is reversed, with small firms dominating. The
average employment growth rate of small
firms up to four years old jumps from 4 percent for continuers to 53 percent for all firms.
This result stems from the fact that the vast
majority of entrants are small, and by construction the growth rates of newly created
firms are highest.
Hence, the evidence on firm dynamics in
Colombia suggests that young rather than
small firms are the main employment creators. This evidence is consistent with recent
findings for the United States (Haltiwanger,
Jarmin, and Miranda 2013). Further research
could determine the role of young firms in
employment generation across LAC.
However, increasing the effectiveness
of programs aimed at supporting firm (and
employment) growth may call not just for a
shift of emphasis from small to young firms.
A deeper understanding of the characteristics
of young firms of all sizes that enable them
to survive and thrive in market economies
is also necessary. Unfortunately these characteristics of young dynamic firms remain
unknown, thus making policy making in this
area complicated. Coordinating efforts with
the private sector, leveraging the screening


abilities of private agents, and using risk-
sharing arrangements to align incentives
could help governments try to pinpoint firms
worthy of public sector support.

The region has many
entrepreneurs but little
innovation
There are many potential reasons why LAC
firms grow as slowly as they do. One is the
lack of innovation. Entry is just the beginning
of the story. In order to grow, or even survive,
firms need to continuously innovate.
It is in this domain of entrepreneurship
that businesses in LAC score relatively badly.
LAC firms introduce new products less frequently than firms in otherwise similar economies, high- nd entrepreneurs tend to be far
e
away from global best practices in the management of their enterprises, firms’ investment in R&D is low, and patent activity is
well below benchmark levels.
Some of the most successful LAC firms
have managed to grow out of their national
boundaries during the last decade and are
now competing on world markets. The success of high- nd companies such as Vale,
e
Embraer, and CEMEX notwithstanding,
innovation in LAC is limited, with even some
of the giant multilatinas underperforming
their peers from other countries. Many formal firms in the region are engaged in some
form of innovation, but the intensity of
innovation tends to be low or poorly suited
to raise productivity. Figure 1.6 shows the
percentage of firms that developed or introduced a new product (product innovation) in
selected countries between 2006 and 2010.
The LAC countries are bunched toward the
low end of the scale.6 On average, firms in
the region are 20 percent less likely to have
introduced a new product than the middle-
income countries in ECA— nd the picture
a
appears even grimmer for most of the Caribbean, where the likelihood of introducing
a new product drops to half that of firms
in ECA.
Figure 1.6 measures the share of firms
involved in innovation activities, which is

11/21/13 4:00 PM

8


FIGURE 1.6 Percentage of firms in selected
countries introducing a new product, 2006–10
St. Lucia
Dominica
Jamaica
Antigua and Barbuda
Nicaragua
Venezuela, RB
Mexico
Guyana
Trinidad and Tobago
St. Kitts and Nevis
Ecuador
St. Vincent and the Grenadines
Malaysia
Dominican Republic
El Salvador
Uzbekistan
Uruguay
Guatemala
Romania
Spain
Bolivia
Honduras
Costa Rica
Chile
Paraguay
Colombia
Greece
Peru
Turkey
Argentina
Suriname
Bulgaria
Korea, Rep.
Azerbaijan
Grenada
Kazakhstan
Germany
Croatia
Ireland
Ukraine
Hungary
Georgia
Poland
Moldova
Slovak Republic
Macedonia, FYR
Russian Federation
Thailand
Serbia
Czech Republic
Albania
Latvia
Armenia
Bosnia and Herzegovina
Slovenia
Lithuania
Belarus
0
LAC countries

20 40 60 80 100
Percent

Other countries

Source: World Bank, based on data from Seker 2013 and 2006–10 Enterprise Surveys.
Note: LAC = Latin America and the Caribbean.


uninformative about the quality and intensity
of innovation, two factors strongly associated with high- roductivity firms. Datasets
p
exploring these fundamental factors in a
comparable way across countries are of poor
quality. The few available indicators suggest
that the quality of innovation in LAC may be
as much of an obstacle to firms’ growth and
productivity as the quantity.
Figure 1.7 shows aggregate investment in
R&D. Panel a compares regional averages
as a percentage of value added in manufacturing (the sector where most R&D takes
place). Panel b benchmarks R&D against
the average of countries at similar stages of
development.7 Average R&D investment in
the five largest LAC economies is two- hirds
t
that of China when expressed as a percentage
of manufacturing value added and one- hird
t
when expressed as a percentage of GDP. For
the remaining LAC countries, R&D investment is about a third that in China when
expressed as a percentage of manufacturing
value added and a tenth that of China when
expressed as a percentage of GDP. These
innovation gaps are worrisome.
A second feature that distinguishes LAC
from China and high-ncome countries is the
i
preponderant role the public sector plays in
R&D (the public sector also accounts for a
large share of R&D in ECA) (Pagés-Serra
2010).8 This is not to say that the public sector in LAC invests excessively in R&D: as a
percentage of GDP, it invests much less than
China or high-ncome countries. The finding
i
rather reflects how little private LAC firms
invest in innovation.
The extent to which lower levels of R&D
are likely to translate into lower productivity and economic growth is, of course,
influenced by many factors. But panel b of
figure 1.7 indicates that economies that experienced periods of sustained growth often
had bursts of R&D investments that placed
them well above their peers (relative to the
blue line). LAC’s low levels of R&D, and the
fact that little of it is conducted by the private
sector, appears to be one of the main culprits
behind the region’s well- ocumented history
d
of low productivity growth.

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O v er v ie w
9

FIGURE 1.7 Investment in research and
development (R&D) in selected country groups,
2008–10
a. R&D by region
Other LAC
ECA
LAC5
China
High-income
countries
0

2
4
6
8
10 12 14 16
R&D/manufacturing value added (%)

Business enterprise
Higher education
Foreign

Government
Private nonprofit

b. R&D by level of GDP
5
Israel

R&D (% of GDP)

4
Finland

3

Korea,
Rep.

2
China

1

India
Colombia

0
100

Brazil
Costa
Rica
Guatemala

Uruguay
Argentina
Mexico

1,000
10,000
GDP per capita (PPP)

100,000

Sources: Panel a: World Bank, based on data from World Development
Indicators (WDI) and UNESCO. Panel b: Updated from Lederman and
Maloney 2003 using WDI.
Note: For countries and economies included in each group, see note 4.
GDP = gross domestic product. PPP = purchase power parity. R&D =
research and development. The blue line is a regression-fitted line estimated with data from 1996 to 2011 covering 119 countries.

A similar picture emerges from data on
patents. Figure 1.8 shows the number of patents per million people that inventors from
different countries received from the U.S. Patent and Trademark Office (USPTO) between
2006 and 2010. No LAC country exhibits a
level of patents that approaches that of high-
income countries, and most LAC countries


FIGURE 1.8 Number of patents per capita granted by U.S. Patent
and Trademark Office, actual and benchmarked, by inventor’s
country or place of residence
Uzbekistan
Haiti
Bolivia
Paraguay
Albania
El Salvador
Indonesia
Honduras
Kazakhstan
Guatemala
Peru
Azerbaijan
Colombia
Ecuador
Macedonia, FYR
Dominican Republic
Philippines
Ukraine
Turkey
Venezuela, RB
Serbia
Belarus
Georgia
Oman
India
Thailand
Armenia
Mexico
Jamaica
Brazil
Uruguay
United Arab Emirates
Argentina
Saudi Arabia
Latvia
Poland
Chile
Russian Federation
China
Trinidad and Tobago
Portugal
Slovak Republic
Lithuania
St. Kitts and Nevis
Greece
Croatia
Costa Rica
Bulgaria
Kuwait
Antigua and Barbuda
Czech Republic
Malaysia
Hungary
Spain
Slovenia
Italy
New Zealand
Ireland
France
Norway
Belgium
United Kingdom
Australia
Austria
Hong Kong SAR, China
Singapore
Netherlands
Denmark
Canada
Germany
Sweden
Finland
Korea, Rep.
Switzerland
Israel
Japan

LAC countries
Other countries
or economies
Benchmark

1
10
100
1,000
Patents per 1 million people

10,000

Source: World Bank, based on data from USPTO 2012 and World Development Indicators.
Note: Dots represent predictions from a multivariate regression analysis that includes the log of patents
per million people on the log of gross domestic product (GDP) (adjusted for purchasing power parity),
the log of population, and the log of merchandise exports to the United States. They indicate where
each country stands with respect to countries with similar levels of GDP, population, and merchandise
exports to the United States. The regression used all countries and economies for which data were
available; the figure presents only comparator countries. Data are averages for 2006–10. LAC = Latin
America and the Caribbean.

11/21/13 4:00 PM

10


received fewer patents than their middle-
income country peers. Brazil, for instance,
registered only 5 patents per million people
between 2006 and 2010, half the number per
capita of China (10) and slightly less than a
quarter the number per capita of Bulgaria
(22). To be sure, part of these differences
can be explained by lower levels of economic
development and lower exports to the United
States (which imply fewer incentives to apply
for patents from the USPTO). But even after
controlling for per capita income, population
size, and exports to the United States, the patent intensity in most countries in the region
remains below their benchmark, including
Brazil (figure 1.8).
R&D and patenting are proxy measures of
the intensity and quality of innovation. They
indicate only indirectly how firms perform in
terms of process innovation. An additional
dimension is the quality of management
practices, which can be assessed following
the methodology developed by Bloom and
Van Reenen (2007).
Figure 1.9 compares management practices of manufacturing firms across different
dimensions for a number of high-ncome and
i
LAC countries as well as China and India (the
sample of comparator countries is dictated
by countries in which management surveys
were conducted). LAC countries other than
Mexico score toward the bottom of the distribution, with management practices closer
to those of Chinese and Indian firms than to
high-ncome countries. Given that LAC firms
i
face higher labor costs than firms in China
and India, poor management practices in the
region pose a more severe competitive disadvantage for them.
Part of the LAC “management gap” can
be explained by firm characteristics. Firms
in high-ncome countries have a larger share
i
of employees with college degrees, are larger,
and are more likely to be multinationals
than firms in LAC. These firm characteristics explain at most a third of the management gap between the median firm in LAC
and the United States, however. Part of the
remaining two- hirds of the gap could be
t
explained by the training and ability of LAC


managers and entrepreneurs. Factors external to the firms, such as the business environment and other country characteristics,
are also likely to explain the region’s deficit
in managerial practices and hence process
innovation.

Few companies enter
export markets
Accessing new markets through trade is
arguably a salient manifestation of transformational entrepreneurship. Barring firms that
benefit from high rents, only firms with superior performance can thrive in export markets. In fact, most new entrants into export
markets do not survive beyond one year.
This report documents a number of stylized facts that characterize LAC exporting
firms. In particular, although entry rates
into exporting activities remain significantly
below those in (poorer) comparator countries, the survival rates of the few firms that
attempt to export tend to be at or slightly
above benchmark levels. Moreover, analysis
of the contraction of foreign demand during
2008– 9 suggests that exporting entre0
preneurs respond well to pressure: in the
face of the crisis, they nimbly opened new
exporting firms and developed new export
products, in the process penetrating new
export markets. Thus, it seems that the old
adage “necessity is the mother of invention”
applies to export entrepreneurship. The
report also provides evidence that export
promotion policies that help entrepreneurs
surmount certain barriers to entry by providing information about global markets.
Research conducted for this report benchmarked entry and survival rates in the
region using a new firm-evel database, the
l
World Bank’s Exporter Dynamics Database
(figure 1.10).9
The results are striking: virtually all
LAC countries in the sample show export
entry rates that are below the benchmark.
In contrast, in Asia, the Middle East, and
even Africa, entry rates of firms into exporting activities are above the benchmark.
LAC countries fare better in the survival

11/21/13 4:00 PM

O v er v ie w
11

FIGURE 1.9 Management practices in selected economies
a. Overall management practices
United States
Japan
Germany
Sweden
Canada
United Kingdom
Italy
France
Australia
Mexico
Poland
Northern Ireland
New Zealand
Portugal
Republic of Ireland
Argentina
Chile
Greece
China
Brazil
India
2.0

b. Operation management

3.5

2.0

d. Target management
Japan
Germany
United States
Sweden
Italy
Canada
France
Australia
United Kingdom
Poland
Mexico
New Zealand
Northern Ireland
Portugal
Republic of Ireland
Argentina
Brazil
Greece
China
Chile
India
2.0

Sweden
United States
Germany
Canada
Japan
France
United Kingdom
Mexico
Italy
Australia
Portugal
Poland
New Zealand
Argentina
Chile
Brazil
Northern Ireland
Republic of Ireland
Greece
China
India

United States
Germany
Sweden
Japan
Canada
Australia
New Zealand
Italy
France
United Kingdom
Greece
Argentina
Portugal
Mexico
Northern Ireland
Chile
Republic of Ireland
China
Poland
Brazil
India
2.5
3.0
Mean score

c. Performance monitoring

2.5
3.0
Mean score

3.5

2.0

2.5
3.0
Mean score

3.5

e. Talent management
United States
Canada
Japan
Germany
United Kingdom
Poland
Sweden
Northern Ireland
Italy
Mexico
Australia
Republic of Ireland
China
France
Chile
New Zealand
Greece
Argentina
Portugal
India
Brazil

2.5
3.0
Mean score

3.5

2.0

2.5
3.0
Mean score

3.5

LAC countries

Other countries
or economies

Source: Maloney and Sarrias 2012.
Note: Surveys sampled manufacturing firms with 100–5,000 employees recorded in Orbis. LAC = Latin America and the Caribbean.


11/21/13 4:00 PM

12


FIGURE 1.10 Average entry and one-year survival rates in selected
countries (differences with respect to baseline)

Chile
El Salvador
Costa Rica
Colombia
Bulgaria
Mexico
Guatemala
Macedonia, FYR
Peru
Ecuador
Jordan
Morocco
Mauritius
South Africa
Dominican Republic
Mali
Senegal
Nicaragua
Bangladesh
Kenya
Burkina Faso
Tanzania
Pakistan
Cameroon
Iran
Cambodia
Malawi
Niger
Uganda
–0.3
Average entry rate

–0.2

–0.1
0
0.1
0.2
Log of GDP per capita

0.3

0.4

Average 1-year survival rate of new entrants

Source: Estimations by Ana M. Fernandes and Daniel Lederman (World Bank), based on data from
the World Bank’s Exporter Dynamics Database, World Development Indicators, and World Integrated Trade Solution (WITS) database.
Note: Figure shows estimates of each country’s dummy variable from an econometric model that
also includes (the log of) GDP per capita (adjusted for purchasing power parity), the Vollrath (1991)
index of revealed comparative advantage at the six-digit level of the Harmonized System (HS) classification, industry dummies, and year dummies. The industry dummies are defined at the two-digit
level of the HS. The excluded benchmark country is Albania. Data are for 2005–09.

dimension, with survival rates of the (relatively small number of) firms that enter into
exporting markets above the benchmark.
However, no LAC country appears to be
an overachiever on the survival front when
compared to most of the other developing
countries included in the database, as shown
in figure 1.10, after controlling for GDP
per capita.


However, exporting entrepreneurs tend
to display a significant capacity to adapt to
and cope with adverse circumstances, which
suggests that greater competitive pressures
could be an antidote to the dearth of innovation among high- nd export entrepreneurs
e
in LAC. The agility of incumbent exporters
is illustrated by their reactions to the drop
in foreign demand in 2008– 9. During
0
this period, average LAC export growth
by incumbent exporters was negative. But
their sales of new products raised exports
by 3 percent on average, and their sales to
new destinations raised exports by 4 percent
(Fernandes, Lederman, and Gutierrez- ocha
R
2013). Furthermore, the contribution of
new exporters (entrants) to national export
growth increased when the global crisis hit
in 2008, even though entry rates did not rise.
During the steady growth period (2005– 7),
0
incumbent exporters played a dominant role
in explaining export growth in both LAC
and non– AC countries, among all types
L
of exporters (natural resource based, simple
processing, and diversified manufactures)
(panel a of figure 1.11). In contrast, new
exporting firms were an important contributor to exports in LAC during 2008– 9.
0
Export growth in LAC during the global
crisis would have declined more sharply
than it did if exports by new entrants had
not compensated for the exit of incumbent
firms (panel b of figure 1.11) and incumbent
exporters had not found new markets.
Export promotion services also appear to
increase entry and survival rates and therefore overall export activity. The economic
justification for export promotion is often
based on some form of information failure,
related to the public good nature of information that leads to its underproduction by
private firms. For instance, existing exporters
have no incentives to share information about
foreign market conditions and opportunities
with potential competitors after incurring the
costs of discovering how to export profitably
(Hausmann and Rodrik 2003).
In research conducted for this report,
Lederman, Olarreaga, and Zavala (2013) use
firm surveys from seven LAC countries from

11/21/13 4:00 PM

O v er v ie w
13

FIGURE 1.11 Sources of export growth in selected countries, 2005–07 and 2008–09
b. Decomposition, 2008–09

a. Decomposition, 2005–07
Natural
resources

Ecuador
Costa Rica
Peru
Colombia
Chile
South Africa

Average Manufacturing Simple processing
of LAC
countries

Average Manufacturing Simple processing
of LAC
countries

Natural
resources

Chile
Peru
Ecuador
South Africa
Costa Rica
Nicaragua
Bangladesh
Cambodia
Guatemala
Dominican Republic
El Salvador

Cambodia
Bangladesh
Nicaragua
Guatemala
Dominican Republic
El Salvador

Egypt, Arab Rep.
Brazil
Mexico

Egypt, Arab Rep.
Brazil
Mexico

LAC countries
–0.1

0
0.1 0.2 0.3 0.4
Export growth rate
Exiters
Incumbents

LAC countries
–0.2 –0.1 0
0.1 0.2
Export growth rate

0.3

Entrants

Source: Fernandes, Lederman, and Gutierrez-Rocha 2013, based on data from the World Bank’s Exporter Dynamics Database.
Note: Figures for Ecuador in panel a are for 2006–07. LAC = Latin America and the Caribbean.

2006 and 2010 to analyze the effectiveness
of export promotion services. They find that
firms that used export support services have
a significantly higher probability of entering
and surviving in export markets.

Even large multinational
corporations in the region are
insufficiently innovative
Under the right business environment and
contractual conditions, multinational corporations can be good for the local economy.
They tend to be more productive and to use
the latest technologies; through their engagement with and support of local suppliers, they
can transfer knowledge and better technologies to the local economy, which raise the
quality of inputs and the productivity of firms
(Moran 2001; Javorcik and Spatareanu 2005).
At the same time, they can have negative impacts: by competing in local product
and factor markets, they can drive less efficient local firms to exit, thereby generating


transitional dislocations. Although the elimination of inefficient local firms may not ultimately be bad for a country’s economy, in the
short term it may adversely affect workers
and create social and political tensions.
This report provides evidence that multi
national corporations have had significant
net positive impact in LAC economies in
recent years: the positive impacts from technology transfers, knowledge spillovers, and
linkages have overwhelmingly dominated
the negative impacts from greater competition in product and factor markets. The full
potential of multinational corporations has
not been fully realized, however, because
multinational affiliates in LAC behave like
local firms, investing very little in innovation.
Thus, either LAC is not attracting the most
innovative multinationals or the obstacles
that local firms face to innovate also act as
barriers to innovation for foreign firms operating in the region.
The recent emergence of multilatinas
has not changed this picture. On average,

11/21/13 4:00 PM

14


multilatinas conduct less research than their
peers from other regions. The large majority of their business is concentrated in Brazil, Mexico, and Chile. They therefore miss
the opportunities presented by greater integration, both regionally and globally. When
multilatinas expand abroad, typically to
neighboring countries, their affiliates often
operate in the same sector as the parent company, suggesting that these firms are driven
by the search for larger markets and the
desire to diversify country risk rather than
the desire to establish linkages and clusters,
thereby deepening their involvement in productive networks and global value chains.
The higher productivity and more innovative behavior of multinational corporations
relative to local firms in LAC are reflected
in many dimensions. Everything else equal,
the probability that a firm introduces a new
product is about 11 percentage points higher
for a foreign- wned firm operating in LAC
o
than for domestic firms, and the probability of introducing a new process is about
5 percentage points higher (figure 1.12).
FIGURE 1.12 Innovation edge of foreign multinational
corporations over local firms in Latin America and the Caribbean
Has an international quality certification

Multinationals are also more likely than
local firms to apply for a patent, trademark,
or copyright; collaborate for innovation purposes with other institutions; invest in R&D;
and adopt foreign technologies. The differences are even larger for efforts to improve
the quality of products. Multinational corporations are 21 percentage points more likely
to engage in quality-mproving investments
i
and 25 percentage points more likely to have
international quality certifications than local
firms, perhaps because they are more likely
to export.
Figure 1.13 quantifies the relative importance of the competition and knowledge
transfer channels, in order to assess the
impact of the entry of multinational corporations on firm-evel and aggregate prol
ductivity. The estimations use a sample of
manufacturing firms from 60 countries,
5 of which are in LAC (Argentina, Brazil,
Chile, Colombia, and Mexico). The results
are striking: other things equal, doubling
the number of multinational corporations in
LAC would increase aggregate productivity

FIGURE 1.13 Predicted productivity gains
from entry of new multinational corporations
in selected country groups, countries, and
economies

Invested to improve quality
control or obtain certification

4.0

Uses foreign technology

3.5
Percentage points

New or significantly improved product
Invested in research and development
New or significantly improved process
Cooperates on innovation with others
Filed for patent, trademark, or copyright

Not significant at 10%

Source: World Bank, based on data from 2010 Enterprise Surveys.
Note: Figures are for the manufacturing sector only. Bars are the coefficients of a dummy variable taking the value 1 if the firm is foreign owned in a regression of innovation variables. Additional controls
include country and industry fixed effects. Standard errors are clustered at the industry level. MNC =
multinational corporations.


2.5
2.0
1.5
1.0
0.5

0
5
10
15
20
25
Additional likelihood by MNC affiliates
(percentage points)
Significant at 10%

3.0

0

High-income China
economies
Knowledge spillover

ECA

LAC5

Market reallocation

Source: Alfaro and Chen 2013.
Note: Figures are for the manufacturing sector only. Bars represent total
productivity gains from doubling the probability of multinational corporation entry, estimated though a structural model. For countries and
economies included in each group, see note 4.

11/21/13 4:00 PM

O v er v ie w
15


FIGURE 1.14 Spending on research and development (R&D)
in Latin America and the Caribbean
a. R&D spending by foreign
affiliates of U.S. multinationals,
1998 and 2008
100

US$ of R&D per thousand US$ of revenue
Hig
h-i
nco
eco
no me
mie
s
Ch
ina
25

80
70

20

60

15

50
40

10

30
20

Middle East
LAC

Asia

ia

0

Ind

2008
Africa

LA
C5

1998
Europe and Canada

ECA

0

P4

5

10

EA

Percent

b. R&D spending by multinational
corporations, by home region
30

90

Sources: Panel a: National Science Board 2012; panel b: World Bank, based on data from Orbis.
Note: Panel a covers only the manufacturing sector. For countries and economies included in
each group in panel b, see note 4.

FIGURE 1.15 Sectoral position of foreign subsidiaries relative to
headquarters in selected country groups, countries, and economies,
2010–11
60
Share of foreign subsidiaries (%)

by 3.8 percent. This number is six times
higher than in ECA or high-ncome econoi
mies and seven times higher than in China.
Moreover, in contrast with other regions,
knowledge spillovers run the entire show in
LAC: they explain almost all the estimated
aggregate productivity gains from entry of
multinational corporations.
Alas, the full potential of productivity
gains from knowledge spillovers from multinational corporations in LAC is not being
fully realized, in part because of very low
levels of R&D by foreign companies operating in LAC and multilatinas. The share of
R&D in LAC accounted for by U.S. multinational corporations, for instance, is only
about one- fth the share of R&D done by
fi
the same companies operating in Asia. Moreover, trends are not encouraging: the share of
R&D performed by U.S. multinational corporations in LAC fell 1.2 percentage points,
to just 3.9 percent of total R&D, between
1998 and 2008 (panel a of figure 1.14).
The emergence of multilatinas, welcome
as it is, has not fundamentally changed the
innovation picture. To be sure, the number of multilatinas is still small, and they
are concentrated in three countries (Brazil, Chile, and Mexico). But despite towering over other LAC companies in size, they
are not sufficiently innovative. On average,
multilatinas from the manufacturing sector invest only $0.06 per $1,000 of revenue on R&D (panel b of figure 1.14). This
figure stands in sharp contrast with R&D
intensity in high-ncome economies and even
i
China and the four economies of EAP4. For
example, multinationals from EAP4 invest
$1.70 in R&D for every $1,000 of revenue—
almost 30 times the R&D investment of the
average multilatina.
A partial explanation for the low level of
innovation of multilatinas may be found in
their motives for sending capital abroad. Multilatinas appear to set up operations abroad
mainly to expand the markets in which they
sell and to diversify country risk rather than
to integrate into global value chains.
Figure 1.15 divides the subsidiaries of multinational corporations from different regions

50
40
30
20
10
0

LAC

China and
EAP4
High-income
India
economies
Location of headquarters
Upstream (relative to parent)

ECA

Horizontal

Downstream (relative to parent)
Source: World Bank, based on data from Orbis.
Note: The sectoral position was calculated using the input-output matrix for the United States.
A subsidiary is defined as downstream if the parent company’s sector is a net supplier of the subsidiary’s sector. A subsidiary is defined as upstream if the subsidiary’s sector is a net supplier of the
parent company’s sector. For countries and economies included in each group, see note 4. LAC =
Latin America and the Caribbean.

11/21/13 4:00 PM

16


into three groups: companies operating in
the same sectors as headquarters (horizontal activity), companies providing inputs to
headquarters (upstream activity), and companies obtaining inputs from headquarters
(downstream activity). Almost half of foreign
subsidiaries of multilatinas operate in the
same sector as their headquarters compared
with 30– 0 percent for other regions. Sub4
sidiaries of multinational corporations from
other regions are thus more likely to establish
vertical (upstream and downstream) linkages with their headquarters. The implication is that many multilatinas fail to transfer
knowledge to the home economy through
their involvement in global value chains. This
lack of integration may be exacerbated by the
fact that most of the cross- order activity of
b
multilatinas takes place in large countries in
the region (Brazil, Chile, and Mexico jointly
account for 70 percent of total multilatinas’
revenues); less than 15 percent of multilatinas’ revenues comes from outside LAC.

How can policy enable
innovative entrepreneurs?
In a tribute to innovation as the key to
growth, Yale University’s Robert Shiller
(2013) recently asserted that “capitalism is
culture. To sustain it, laws and institutions
are important, but the most fundamental role
is played by the basic human spirit of independence and initiative.” But where should
policy makers look for remedies to cure the
low growth and low innovation of LAC enterprises if not in the laws and institutions that
shape the enabling environment for entrepreneurs? The answer surely lies well beyond the
traditional concern with laws and regulations
that impose barriers to entry per se.
The main policy challenges seem to be
related to deeper structural features of the
enabling environment for innovative entrepreneurship, including not only laws and
institutions but also endowments such as
infrastructure and the quantity and quality of human capital. These elements of the
enabling environment are likely to be even


more important for growth as LAC continues to consolidate their hard- arned achievee
ments on the macroeconomic and financial
stabilization fronts.
Pinpointing the enablers of innovative
entrepreneurship is complex, however,
because of the intricate interactions and interdependencies between the various dimensions of the enabling environment that matter
for innovation. These components include the
clarity and reliability of legal rights (including intellectual property rights) and the
judicial process, the quality of information
disclosure and accounting standards, regulations and policies (including procompetition
policy) that affect industry and commerce,
access to suitable financial services, the quality of human capital (education and skills),
and programs and policies that promote
or support business development or R&D.
Complexity also arises because both entrepreneurial innovation and its possible determinants may be affected by common factors
and hence jointly determined. For instance,
an economy’s contractual environment may
simultaneously affect both access to credit
and innovation.
Some areas where policy action may be
most fruitful can nevertheless be identified
by highlighting some of the dimensions of the
enabling environment that are vital to innovation and on which LAC countries significantly underperform.
Competition is a first and highly plausible candidate. To be sure, the relationship
between competition and innovation may
follow an inverted U- hape, as Aghion and
s
others (2005) compellingly argue: too much
competition may weaken the incentives to
innovate for firms that lack basic capabilities
and are far from the technological frontier,
whereas too little competition may not provide sufficient incentives to invest in innovation. The evidence suggests, however, that
LAC suffers from too little rather than too
much competition, particularly in the markets for inputs and nontradable services. This
lack of competition undermines the incentives to innovate, as enterprises can remain

11/21/13 4:00 PM

O v er v ie w
17

profitable by dint of their market power
rather than their innovative efforts. Without
a perceived necessity to innovate, the private
sector may not give birth to invention.
Figure 1.16 benchmarks LAC countries
in terms of revealed market concentration
in industries that are arguably not subject
to international competition.10 Most LAC
countries appear at the upper end of the distribution of the (nontradable) market concentration index, and all but two (Colombia
and Brazil) exhibit average levels of market
concentration well above their international
benchmarks. Hence, competition should
remain at the top of the policy agenda in
most LAC economies.
A second fundamental factor behind the
lack of innovation in LAC seems to be its
human capital gap, particularly in the education quality dimension. The region lacks
the type of human capital— ngineers and
e
scientists—hat is likely to produce innot
vative entrepreneurs. A country’s stock of
human capital is often measured by average
years of schooling of the labor force and by
the quality of education, assessed through
standardized scholastic test scores. LAC
countries underperform international comparators on both measures, especially quality
(Ferreira and others 2013). However, human
capital for entrepreneurship and innovation
only partially overlaps with general curricula and is probably badly captured by general schooling attainment or achievements.
Hence, it is worth also examining the region’s
chronic shortage of scientific and engineering
training.
LAC has long suffered from a dearth of
engineers: despite higher income per capita,
Argentina, Chile, and Mexico all had lower
densities of engineers than Spain and Portugal in 1900 (figure 1.17). Such historical gaps
appear to be important. Maloney and Valencia Caicedo (2012) find a positive association
between engineering density in the 1900s
and per capita income in the 2000s.
LAC countries still have fewer engineers
than the median country and fewer than
would be expected given their current level


FIGURE 1.16 Actual and benchmarked index of competition in
17 nontradable industries in selected countries or economies
LAC countries
Other countries
or economies
Benchmark

United States
Bulgaria
Romania
Poland
Canada
Hungary
Russian Federation
Lithuania
Czech Republic
Norway
Colombia
Latvia
Korea, Rep.
Japan
Portugal
United Kingdom
Switzerland
Macedonia, FYR
China
Italy
Ireland
Germany
Croatia
Serbia
Belarus
Thailand
Spain
Sweden
Austria
Finland
Netherlands
Argentina
Greece
Denmark
Brazil
Singapore
Australia
Belgium
Turkey
Mexico
France
Philippines
Malaysia
Moldova
Israel
New Zealand
Kuwait
Hong Kong SAR, China
Ecuador
Kazakhstan
Indonesia
Chile
Peru
Albania
Saudi Arabia
India
Uruguay
Dominican Republic
Oman
Guatemala
Bolivia
Jamaica
United Arab Emirates
Paraguay
Venezuela, RB
Trinidad and Tobago
Nicaragua
El Salvador
Costa Rica
Honduras

0

0.2

0.4
Herfindahl index

0.6

0.8

Source: World Bank, based on data from World Development Indicators and firm-level data from Orbis.
Note: Bars show the average Herfindahl index of concentration of revenues across a selection of
two-digit nonfinancial services sectors for which data were available for more than 80 countries.
A value of 1 represents a market captured entirely by a single firm (the highest level of concentration); lower values indicate less concentration. Revenues were averaged across 2007–10. Dots
represent a benchmark predicted value from a regression for each sector with (log of) population
and GDP (adjusted for purchasing power parity) as explanatory variables. The regression model was
estimated for each of 17 sectors separately; the dots are the averages of all sectors. The regression
used all available countries. The figure presents only comparator countries. LAC = Latin America
and the Caribbean.

11/21/13 4:00 PM

18


FIGURE 1.17 Income and engineering density in
selected economies, 1900

Engineers per 100,000 male workers

180

United States, north

150
120
90

United States

60
30
0
6.0

United States, south
Venezuela, RB
Portugal Spain
Chile
Brazil
Colombia
Argentina
Mexico
Peru

6.5
7.0
7.5
8.0
8.5
Log of GDP per capita (US$ in 1900)

9.0

Source: Maloney and Valencia Caicedo 2012.
Note: GDP = gross domestic product.

of development (figure 1.18). Even the larger
and more advanced countries in the region
(Brazil, Chile, Colombia, and Mexico) have
relatively few engineers.
LAC students may be inclined toward
nonscientific studies for at least two potential reasons. First, for historical reasons,
LAC universities have long emphasized the
humanities; law; and social, economic, and
political fields of study, possibly constraining
their ability to educate more engineers and
scientists. Switching their emphasis would
require very aggressive public policy, such as
the United States adopted when it developed
mining and engineering studies in the early
20th century. Second, young people may be
attracted to fields of studies that are relevant
to pressing problems faced by their societies, which may explain why LAC may have
formed many sociologists and more macro
than micro economists. Given the progress
the region has made in taming macro instability, there may be more incentives for students to embark on scientific careers. That
said, a big push to expand engineering and
scientific education at the secondary and tertiary levels may be required to accompany
rising demand for such careers.


FIGURE 1.18 Number of engineers per million
people in selected countries
LAC countries

Honduras
Guyana
Uruguay
El Salvador
Brazil
Argentina
Indonesia
Colombia
Mexico
Serbia
Saudi Arabia
Chile
Turkey
Hungary
Netherlands
Armenia
Norway
United States
Latvia
Croatia
Sweden
Bulgaria
Belgium
Greece
Germany
Denmark
Japan
Malaysia
Portugal
Austria
Lithuania
Poland
Slovenia
Switzerland
Spain
Czech Republic
New Zealand
Slovak Republic
Ireland
Finland
Ukraine
Thailand

Other
countries
Benchmark

0

10
20
30
Engineering graduates per million
inhabitants, ages 15–24

Source: World Bank, based on data from World Development Indicators
and UNESCO 2013.
Note: Bars show average number of engineering graduates per million people ages 15–24. Dots are a benchmark predicted by a regression with (the
log of) population and GDP (adjusted for purchasing power parity) as the
explanatory variables. The regression uses all the available countries. The
figure presents only comparator countries. Data are averages for 2008–10.
LAC = Latin America and the Caribbean.

11/21/13 4:00 PM

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